Regulatory and Industry News Alerts from Armanino

American Jobs Plan and Proposed Changes in Corporate and International Tax

by Jon Davies, Surbhi Bordia
April 08, 2021

On March 31, President Biden unveiled the American Jobs Plan, which focuses on investment in various infrastructure-related initiatives and enhancements in research and development and other areas. The plan is intended to create millions of good jobs, rebuild the country’s infrastructure, and position the United States to out-compete China.

In total, the American Jobs Plan includes about $2 trillion in spending over the next eight years. It is expected to be fully paid for within the next 15 years by President Biden’s proposed Made in America corporate tax plan. Below are key details of the Made In America plan, as well as key points of a proposed Senate framework that includes similar changes to the current U.S. international taxation on corporations.

Made in America Tax Plan

The key highlights of the Made in America corporate tax plan are:

  • Increase in the federal corporate tax rate from 21% to 28%.
  • Further tightening of inversion rules.
  • Increase in tax on global intangible low-taxed income (GILTI) from 10.5% to 21%; GILTI calculation on a country-by-country basis; and elimination of qualified business asset investment (QBAI), which currently provides exemption of a 10% return on foreign tangible assets.
  • A 15% minimum tax on corporate book income levied on companies with revenue over $100 million.
  • Eliminate the foreign-derived intangible income (FDII) deduction, which currently provides for certain profits to be taxed at an effective tax rate of 13.125%, and incentivize corporations that take R&D initiatives within the U.S.
  • Provide a tax credit for certain onshoring activity and deny expense deductions on jobs that were offshored.
  • Eliminate tax preferences (i.e., deductions and credits) for fossil fuels for the fossil fuel industry.
  • Ramping up of corporate tax enforcement.

Overhauling International Taxation Framework

On April 5, in continuation of the effort to overhaul U.S. international tax, the Senate Finance Committee Chair Senator Ron Wyden (D-Oregon), Senator Sherrod Brown (D-Ohio) and Senator Mark Warner (D-Virginia) released an outline of proposed changes to the current U.S. international taxation on corporations, in the Overhauling International Taxation framework. The framework aligns with the Made in America corporate tax plan largely but does differ on some select provisions. The key provisions in the framework are summarized below:

Changes to current GILTI regime:

  • Increase the GILTI tax rate from 10.5% to 21% or to 28%, which equals the GILTI tax rate to the U.S. corporate tax rate. The framework provides that the final determination will depend heavily on corresponding decisions regarding the U.S. corporate rate, base-stripping protections and other potential incentives or disincentives for U.S. and foreign investment.
  • Move the GILTI calculation from a global basis to a country-by-country basis, effectively taxing income earned in low-tax jurisdiction at 21%, with the intent to create separate foreign tax credit “baskets” on a country-by-country basis.

Incentivize companies to perform research and create management jobs in the U.S.

  • According to the framework, the research and management expenses that actually occur in the U.S. should be treated as entirely domestic source expenses, eliminating foreign tax credit penalties under GILTI and helping retain these activities in the U.S.

Instead of repeal, repair and rebrand FDII

  • Repeal current FDII QBAI rules, which currently provide a company FDII benefit if it moves its factories or puts new investment abroad.
  • Rename and replace the current “foreign-derived intangible income” with “foreign-derived innovation income” focused on U.S. innovation to reward companies that continually invest in the economy and strengthen the workforce, rather than just rewarding companies with huge profits.
  • The framework provides that current FDII’s “deemed intangible income” would be replaced with a new metric, “deemed innovation income.” The new “DII” would be an amount of income equal to a share of expenses for innovation-spurring activities that occur in the U.S., such as R&D and worker training. It would only apply if the expense were for U.S. activities.

Reform the Base Erosion and Anti-Abuse Tax (BEAT)

  • Reform the BEAT, rather than repeal it.
  • Modify BEAT to provide full value to domestic business tax credits so that they are “fully restored.”
  • Add a higher second-rate bracket to BEAT, specifically on base-eroding payments and provide that regular taxable income would still be subject to a 10% rate.
  • According to the framework, concerns over the interaction of the BEAT regime and foreign tax credits “could be addressed based on the availability of additional revenue from the BEAT system.”

Comments and feedback on the framework are requested and can be sent to [email protected] by no later than April 23. (Such a short duration on obtaining comments indicates that the Democrats are moving fast on the next tax reform.)

Who Does This Apply To?

U.S. companies with and without international operations should be aware of the proposed changes and model out scenarios in the event these proposals get enacted.

Start Planning Now

CFOs, VPs of tax, in-house tax directors, and tax advisors advising U.S. companies should act now to understand the impact of the anticipated tax law changes and determine what operating model changes to make to effectively manage their global tax cost. Proactive forecasts of income and expenses, key inputs and assumptions are critical. We highly recommend tax modeling, especially for companies with international footprints.

If you have questions or would like to discuss next steps further, contact our international tax experts.

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Jon Davies - Partner, Tax - San Jose CA | Armanino
Surbhi Bordia, Tax
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